Page 151 - Profile's Unit Trusts and Collective Investments 2021 issue 2

Classification of CISs

ILLAs and Preservation Funds
A retirement annuity (or RA) is a tax-deductible retirement funding vehicle (ie, a savings
plan towards retirement). A preservation fund is an approved vehicle for holding the
proceeds of a pension or provident fund until retirement (eg, when changing jobs). An
ILLA is an investment-linked living annuity which may be established at retirement age. Unlike a
traditional life annuity, which pays a fixed monthly amount during retirement, an ILLA allows the
investor to draw against income and/or capital in a flexible way. ILLAs are attractive because the
capital amount forms part of an investor’s estate, whereas the rights to a life annuity die with the
investor (or the second of joint annuitants). A major problem with ILLAs, however, is capital erosion
where the retirement lump sum is too small to produce sufficient income to satisfy the retiree’s
monthly needs. Most LISPs offer RAs, ILLAs and preservation fund products which allow investors to
select underlying unit trusts provided the aggregate exposure by asset class conforms to Reg 28.

High, Medium and Low Equity Funds
Like Flexible funds, these multi-asset portfolios invest in the full spectrum of assets classes:
equities, bonds, money market securities and listed property stocks. The key difference is the limit
placed on equity exposure in each category. On the assumption that equities are usually the most
volatile asset class, these categories seek to group funds together according to differing levels of
risk – from an investor’s point of view, a fund in the Low Equity sector is regarded as less risky
than a fund in the Medium Equity category, which in turn would be seen as less risky than a fund
in the High Equity sector.
The High, Medium and Low Equity sectors all restrict property exposure (ie, holdings in listed
property shares) to a maximum of 25% of assets. This includes exposure to international property.
In addition, the sectors have the following equity exposure ceilings:
High Equity funds may have a maximum effective equity exposure (including international
equity) of up to 75%;
Medium Equity funds may have a maximum effective equity exposure (including
international equity) of up to 60%; and
Low Equity funds funds may have a maximum effective equity exposure (including
international equity) of up to 40%.
Income Funds
The Income funds sector, previously found under the then Fixed Interest category (now
Interest Bearing), contains funds that seek to maximise income yield while at least preserving
capital. These funds invest predominantly in government bonds, fixed-deposits and other high
income-earning securities, although under the 2013 classification revision they are allowed to hold
equities and listed property shares as well. This is the reason that the Income funds sector was
moved from the Fixed Interest category to Multi Asset.

What is the STeFI?
The STeFI, industry benchmark for cash-equivalent investments – and the ASISA
benchmark for South African Interest Bearing Short-Term funds – is a set of proprietary
indices designed by Alexander Forbes to reflect average short term interest rates. They
are calculated and published daily by the South African Futures Exchange division of the JSE. The
STeFI composite index is calculated from four narrower indices as follows:
• 15% of the STeFI Call Deposit Index, which is based on an Interbank call rate (SARB-SABOR)
• 30% of the STeFI 3 month NCD Index (3 month NCD instruments measured at SAFEX rates)
• 35% of the STeFI 6 month NCD Index (6 month NCD instruments measured at SAFEX rates)
• 20% of the STeFI 12 month NCD Index (12 month NCD instruments measured at SAFEX rates)
Alexander Forbes also produce a Money Market Index (AFMMI).

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